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Edited version of private advice
Authorisation Number: 1051530644833
Date of advice: 19 June 2019
Ruling
Subject: Lump sum payment
Question
Is the lump sum ex gratia payment made by your former employer assessable as ordinary income?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2019
The scheme commences on:
July 2018
Relevant facts and circumstances
You made claims against your former employer that during your employment with them you had not been paid at the appropriate rate as per your employment award.
You received a letter from your former employer stating they disagreed with your claims, but offered a settlement amount as an ex gratia payment to finalise the matter. The settlement offer required you to sign a Deed of Release.
You accepted the settlement offer.
You signed the Deed of Release and received the agreed settlement money.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year.
An amount is ordinary income if it meets the ordinary meaning of income while an amount is statutory income if it is not ordinary income but is specifically included in assessable income by a provision of the taxation legislation.
An ex gratia payment is one that is given as a favour or gift.
The term 'gift' is not defined in the ITAA 1997. Therefore, the word 'gift' takes its ordinary meaning. Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:
- There is a transfer of the beneficial interest in property
- The transfer is made voluntarily
- The transfer arises by way of benefaction, and
- No material benefit or advantage is received by the giver by way of return.
After considering the full circumstances of your ex gratia payment it is considered that the payment is not a true 'gift', but rather paid to you to settle your underpayment dispute with your employer. When you signed the Deed of Release you entered into an agreement with your employer to release them from all claims relating to the dispute in return for the payment. Therefore the ex gratia payment is not considered a 'gift'.
In any case, ATO Interpretative Decision 2003/263 demonstrates that an 'ex gratia' payment can be considered income. In that ATO Interpretative Decision the payer had no obligation to make the payment that they did but it was considered to be income of the recipient as the payment was meant to substitute for part of the recipient's salary.
Taxation Determination TD 93/58 states that a lump sum compensation or settlement payment is considered to be ordinary income if the payment is in relation to claims for loss of income only.
In your case, your claims against your employer were in relation to underpayment of income only. You did not make any claims of a non-income nature.
As all your claims were in relation to income, any amount you received as a result of making those claims is considered to be income. Therefore, the 'ex gratia' payment is included in your assessable income as ordinary income.
Even if the 'ex gratia' payment was not considered to be ordinary income, it would be assessable as a capital gain. This is because your right to sue your employer was a capital gains tax (CGT) asset and the 'ex gratia' payment is the capital proceeds you received for surrendering that asset when you settled your claims with your employer. However, as the 'ex gratia' payment is already included in your assessable income as ordinary income, you do not have to also include an amount in relation to the payment as a capital gain. This is because section 118-20 of the ITAA 1997 operates to reduce the capital gain by the amount that is otherwise assessed to you as ordinary income.
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